Under an Immediate Needs Annuity (INA) an income is paid for life and upon death, the payments would cease and no further benefits would be payable. This means that if an individual were to die before the amount of income paid equalled the amount of the original investment, they would effectively lose out. In summary, the earlier the individual were to die the more their estate would lose.
In order to add a level of protection against this there is an option to protect part of the original investment. This is a percentage of the original investment which is typically up to 75% (although with one provider 100% would be paid if death were to occur within the first month).
If an individual is looking for short term protection (for example up to 6 months) there is a variance in the approach of the providers, with one provider automatically including this and another provider providing it as an add on. If the individual is looking for longer term protection, they can opt for Capital Protection.
Capital Protection is effectively a decreasing term assurance plan that pays out a lump sum on death, this would be free of income and capital gains tax but would be included within the estate for inheritance tax purposes. Generally speaking, this is available up to 75% of the value of the original investment which then reduces in line with the benefits that are paid from the INA.
The amount payable would be the initial level of cover selected less any benefits that have already been paid under the INA. When the total amount of benefits paid exceed the level of cover it will then end and no further lump sum would be payable.
As an example, if the INA purchase price was £100,000 and the individual had 75% Capital Protection this would mean in total the individual and their estate would receive a minimum of £75,000. If the individual passed away having received total income of £40,000 from the INA, a lump sum benefit of £35,000 would be paid to their estate.
If the individual passed away having received total income of £75,000 or more from the INA, no lump sum would be payable.
There are many considerations when deciding whether to include Capital Protection, I have highlighted below the advantages and disadvantages:
- If the individual were to die before the selected level of cover had been repaid their estate would receive a lump sum which is free from CGT and Income tax
- The individual can choose the level of protection they want, the lower the level of protection the lower the cost which could mean they can adapt to suit their budget
- It offers the individual peace of mind knowing they will receive some value from their plan irrespective of when they pass away
- There is additional cost, this may mean the individual would have to pay more to receive the level of income they need or accept a lower level of income
- The individual may be paying for an additional benefit they will not actually need
- Any lump sum would be included within their estate and therefore may be liable to inheritance tax (although it may be possible to place the benefits under a Trust which may mean the benefits are not included for inheritance tax purposes)
- The individual can only protect up to 75% and therefore may not receive back as much as they have paid in
- Life expectancy would need to be taken into account when deciding whether to use this benefit and therefore assumptions will need to be used. The individual may live a lot longer than expected which could mean the Capital Protection does not have any benefit
- Once the plan has been taken out it can’t be changed
To summarise, an individual would look to use Capital Protection if they wanted to ensure their estate received some benefits in the event of their death in the earlier years. Whilst 75% would not protect the whole amount it would provide the individual with peace of mind knowing that if they were to die in the earlier years some benefit would be payable to their estate. This would be particularly relevant if they were in poorer health but need to fund some long term care now.
Deciding how to fund care can be complicated, with decisions potentially needed about whether to self fund or use a specially designed plan. As an accredited Society of Later Life Advisers (SOLLA) adviser I specialise in later life planning. If you would like to discuss the options available to you, or on behalf of someone else, please contact me for a free no obligation initial discussion.